If you want to earn credit card rewards for your spending-and you can pay off the balance in a month or two-it could be a wise move that could reap big rewards. And it's a bad idea if you can't afford a car and don't want to apply-or don't think you'll qualify for an auto loan. In reality, it is downright terrible.
Before you lace your shoes and head to the dealership, plastic rectangle in hand, it's crucial to weigh the pros and cons of this purchasing scenario. It may save you a headache-and a lotta money.
Walt's referring to a processing fee. A credit card vendor is responsible for paying a processing fee charged by the card issuer when you pay for a transaction. The fees range from 1.5% to 3.5%. It is usually worth it for stores to pay this fee, as allowing customers to pay with a credit card does not always result in more business. A car dealership is likely not in the mood to pay a 3.5% processing fees for a purchase amounting to tens of thousands of dollars.
However, you may find car dealerships willing to swipe your card. Some may allow you to make at least the down payment, while others may allow you to split your payment between card and cash. But you might find a unicorn: the dealership that will let you pay for the whole thing with your credit card.
If you're dead set on buying a car with a credit card, you can make it a topic during the negotiation process. If you're willing to pay the bill, you may request that the dealership add some processing fees to your bill.
With a credit card, you can get some pretty amazing value for a substantial purchase if you're planning a large purchase.
If you spend a lot of money, you can get a lot of rewards for it. With a card like the Wells Fargo Active Cash® Card, which earns 2% back on all transactions, you would receive an effective rebate of $400. It is not bad, but it is probably only worth it if you don't get stuck with the processing fee. It, however, can supercharge your rewards by grabbing a welcome bonus.
You can split the payment between multiple cards and earn bonuses easily.
The terms are non-binding and are subject to change at the discretion of the issuer.
You can earn 296,000 points or miles from the above cards through minimum spending requirements. If you use those rewards, you could squeeze several thousands in travel out of your car purchase.
Many credit cards provide a variety of incentives for spending a certain amount each year. For each year, the Hilton Honors American Express Surpass® Card awards a free night certificate if you spend at least $15,000 on the card. The certificate can give you a free night at almost any Hilton hotel worldwide, including five-star resorts that cost $2,000+ per night.
Even with points and miles galore, there are plenty of reasons not to buy a car with a credit card-the first being interest.
The average credit card interest rate in America is 20.68%. If you pay $500 a month for a $20,000 balance on a card that charges $20.68% APR, you will end up paying over $14,000 in interest alone by paying the card off. This is double or more the interest you'd pay with the average used car loan interest rate, which ranges between 9% and 12% as of August 2023.
If you pay off your card or cards within a month, you may be able to buy a car with your credit card, which will likely make your credit utilization ratio skyrocket, which should be fine if you can pay your card or cards off within a month. However, if it takes longer than that, your credit score may take a significant impact on your credit score as a result of your high balance. To maintain a good credit score, it is crucial to keep your credit card balances low.
What are some pros and cons of buying a car with a credit card?
If you don't use a credit card to buy a car, you have plenty of 'traditional' options to finance the purchase or get approved for a loan.
If you're able to get a car, getting an auto loan is often the best way to purchase it. Credit card APRs often cost significantly less than interest rates. Plus, a car loan can benefit your credit profile by improving your credit mix, which considers the different types of credit accounts you have-mortgages, credit cards, auto loans, personal loans, and so on.
If you don't have the credit or score to get an auto loan, it's worth asking a trusted family member or friend to co-sign your loan. You'll have a better chance of getting approved, and your interest rate will likely be more favorable.
If you're considering using a credit card to finance a purchase that you can't afford, don't do it. If you have a car you want to trade in, you can drop thousands of dollars off the total cost. If you trade in a car, your total purchase will be the difference between the cost of the car you're buying and the credit for your trade.
Some car dealerships may accept credit card payment for some or all of a car's asking price, but many will not. Even if they do, you could be asked to pay a convenience fee between 1.5% and 3.5%, which can add to your total expenses.
If you want to earn rewards, welcome bonuses, or other credit card rewards from a car purchase, make sure to pay off the entire purchase before you're subject to interest charges. The average credit card APR in America is over 20 percent, making it challenging to get out of debt if you have a high balance.